What News Corp COO Chase Carey Is Really Saying To Fox TV Viewers

News Corp COO Chase Carey made some headlines on Monday when he spoke to the National Association of Broadcasters and hinted that Fox may end up being a cable-only network. News Corp. is one of the media companies battling in court with TV start-up Aereo over whether its legal for that company to provide broadcast TV signals to subscribers, bypassing traditional antennas as well as cable and satellite TV companies.

During his speech Carey mentioned that if Aereo does succeed in the courts, News Corp. could opt to turn Fox into a pay channel. That statement garnered enough attention that News Corp. later issued this statement, expanding on his comments:

News Corporation has a long-standing commitment to the broadcast television business, and to delivering the highest-quality entertainment, sports and news programming to our viewers on a localized basis.  We are committed to broadcasting under a business model where programmers receive fair compensation from parties that want to redistribute our product while continuing to make our product available for free to individual consumers that want to access our signal.
 
We believe that Aereo is pirating our broadcast signal.  We will continue to aggressively pursue our rights in the courts, as well as pursue all relevant political avenues, and we believe we will prevail.
 
That said, we won’t just sit idle and allow our content to be actively stolen. It is clear that the broadcast business needs a dual revenue stream from both ad and subscription to be viable. We simply cannot provide the type of quality sports, news, and entertainment content that we do from an ad supported only business model.  We have no choice but to develop business solutions that ensure we continue to remain in the driver’s seat of our own destiny. One option could be converting the FOX broadcast network to a pay channel, which we would do in collaboration with both our content partners and affiliates.

This argument is really about one thing: retransmission fees. That's the fee that media companies wrestle from cable and satellite providers in exchange for their right to retransmit the channels. For years, these fees were minimal, as the media companies used retransmission rights as a bludgeon to get cable and satellite TV providers to carry lesser sister channels. So in order to retransmit ABC, you had to agree to carry ESPN Classic or News Corp would bundle the Fox Movie Channel as pert of the package that provided retransmission rights for your local Fox station.

But in the past several years, the companies who own local broadcast TV networks have decided that these retransmission rights are worth a substantial amount of money and they see those fees as a way of bleeding more money from their viewers. Because ultimately the fees they get from the cable and satellite companies get passed along to the customers.

And these fees are big money. In fact, when Carey held a second-quarter earnings call with reporters in February, he noted that a doubling of retransmission fees from pay TV distributors had made it possible to increase fourth quarter operating revenues by $35 million. Overall the total operating income for the year was million, up 19 percent year-to-year and the primary reason for that was retransmission fees.

"The reality of retransmission is it enables the broadcast business to be a healthy business," Carey told reporters and analysts. "We've had a very disappointing year ratings-wise, but our broadcast business is up profitability, and that's because we are building it into a dual revenue business," Carey added, noting that its broadcasting business relies on both advertising and retransmission-consent revenue.

But here's the dirty little secret. Until recently, the broadcasting business has never relied on a dual revenue stream. That idea is an invention of accountants, who see retransmission fees as the only way to predictably grow the bottom line. And retransmission fees are even better than advertising, because viewers and the Pay TV distributors aren't able to say no to whatever financial terms the broadcast nets see as "fair."

The increase in retransmission fees might be a bit more palatable if the money was staying with the local TV station. But the networks are asking for an increasingly larger percentage of the fees in exchange for the local affiliate's rights to carry the national network. It's all a big three-card monte play to increase revenues and the customers are the ones trapped into paying ever-increasing monthly fees.

So when you read the stories in the upcoming days that talk about this "Fox may move to a pay channel" headline, remember what is really driving this move.

Greed.